The Japanese economy contracted by 0.4% in Q3 and this is a very big disappointment: the economy was expected to return to growth of 0.5%. Year over year, this is a 1.6% contraction instead of 2.2% predicted. A second quarter of contraction means an official recession.
USD/JPY jumped to 117 before losing 116 and recapturing it. Does this mean more stimulus, making it a buying opportunity, or does it mean that Abe is on his way out?
Private consumption hardly grew, by 0.4%, which means that the impact of the sales tax hike from 5% to 8% is still felt. In Q2, consumption plunged by 5%. The next tax hike is officially planned for October 2015 but is widely expected to be delayed until 2017.
There may be some kind of a silver lining: inventory adjustments could be responsible for some of this fall into recession: businesses cut down inventories – depleting of inventories means that they will need to be replenished in the following quarters.
Also fiscal stimulus is on the cards, perhaps in the size of 3 trillion yen.
This strengthens the notion that Prime Minister Shinzo Abe, now under pressure, is set to call snap elections, asking for a new mandate for his policies, especially a delay in the next tax hike. The sales tax hike in April dealt a blow to the world’s third largest economy and it couldn’t really recover.
PM Abe is set to make a special announcement on Tuesday.
More: USD/JPY: Almost To The Universe & Beyond: New Forecasts – Danske
And here is the chart:Get the 5 most predictable currency pairs